The Inflation Reduction Act (IRA) could benefit many small business startups, allowing them to potentially double the amount they can claim on the research and development tax credit from $250,000 to $500,000 per year against payroll taxes. Existing and expired energy efficiency tax incentives, including 179D deductions and 45L credits, have been expanded significantly.
Under current law, small businesses that may not have enough income tax liability to take advantage of their research and development credit can apply up to $250,000 of the credit toward their Social Security payroll tax liability. The small business would need less than $5 million of gross receipts and be less than five years old to qualify for the expanded credit. The IRA would permit an additional credit of up to $250,000 against the Medicare payroll tax for tax years starting after December 31, 2022. And small businesses can claim the expanded R&D tax credit for the tax year 2023.
Increase and Expansion of 179D Tax Deduction
Currently, architects, engineers, and designers are eligible to be allocated these tax deductions when designing energy-efficient government-owned buildings & improvements.
IRA further expands the potential for architects, engineers, and other designers by making them eligible for 179D tax deductions when designing energy-efficient building systems and improvements for tax-exempt entities. These include charitable organizations, churches & religious organizations, private schools & universities, private foundations, political organizations, other non-profits, Native American tribal governments, and Alaska Native Corporations.
The 179D tax deduction has increased significantly from the current maximum of $1.88 per square foot in 2022 to $5 per square foot for energy-efficient commercial and multifamily buildings four stories or taller. In addition to energy-efficient ground-up construction, energy-efficient retrofits of older buildings will also be eligible. REITs will now have the opportunity to utilize 179D tax deductions to compute earnings and profits.
Additionally, tax-exempt building owners (such as non-profits) will gain the ability to allocate 179D tax deductions to architects, engineers, and designers responsible for designing a building’s energy-efficient systems.
Extension, Increase, and Expansion of 45L Tax Credit
Initially, the 45L tax credits expired at the end of 2021. However, they extended for 2022 through the end of 2032, which creates significant benefits for multifamily developers and homebuilders.
In the current year, the existing energy efficiency criteria and the $2,000 tax credit per dwelling unit will remain unchanged. In 2023, the maximum tax credit increases to $5,000 per dwelling for single-family and multifamily developments.
More guidance will follow on claiming the tax credit by the IRS.
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Maria Stromple, CPA, MST
Maria is a Partner at Wilke & Associates, serving closely held businesses in manufacturing, real estate, transportation/logistics, technology industries, and high net worth individuals and executives in delivering effective tax strategies.